Many people enter into contracts with others to hold their property, with the understanding that the property will revert back to the original owner when the holder dies. It may be convenient to have another party hold property with the intent that the property reverts back to the owner.
One way to accomplish this is to sell the property to the other party and contract with that party to name the owner as the beneficiary of the property in his or her will. This arrangement is often referred to as a contract for will.
The Estate of Gilbert No. 04–16–00641–CV (Tex. App.–San Antonio 2017) case provides an example of the hazards presented by these contracts.
Facts & Procedural History
The facts in this case are straightforward. In 2001, Gilbert’s long-term girlfriend sold her house to him in exchange for Gilbert naming her the sole beneficiary in his will. Gilbert did so in 2006 and updated the will in 2008 without changing the beneficiary.
The couple split up in 2015 and Gilbert changed his will to name his son as his sole beneficiary.
Gilbert died four months later. The girlfriend sued Gilbert’s estate for breach of contract and promissory estoppel.
Contract to Enter Into a Will
Texas law allows parties to contract to enter into a will. This is set out in the Texas Estates Code, which says that a contract executed or entered into on or after September 1, 1979, to make a will or devise, or not to revoke a will or devise, may be established only by:
- a written agreement that is binding and enforceable; or
- a will stating:
- that a contract exists; and
- the material provisions of the contract.
The key point is that the contract has to be in writing. Because the contract was not in writing in this case, the girlfriend dropped the contract claim. She still asserted that she was entitled to relief under promissory estoppel.
Promissory Estoppel Relief
Texas law allows for promissory estoppel. This is a judicial doctrine that allows the court to put the aggrieved party back in the same condition as they were prior to the transaction giving rise to the claim.
The trial court concluded that promissory estoppel did not apply where the actual remedy was to pursue a breach of contract claim. On appeal, the appeals court agreed. The appeals court made it clear that breach of contract is the only remedy available where a decedent failed to live up to his agreement to name a party as the sole beneficiary of his estate. It does not apply in this type of probate litigation type of case.
Advanced Planning for Contract for Wills
There are a number of reasons why people may enter into contracts for wills. Two of the more advanced planning strategies for these arrangements are asset or creditor protection, estate tax planning, and/or the tax benefits associated with the step-up tax basis.
Asset or Creditor Protection
A person may enter into a contract to enter into a will as a way of protecting their assets from creditors. By transferring ownership of the assets to another person, the assets are no longer owned by the individual and may be protected from being seized by creditors.
Estate Tax Planning
The same concepts above for asset protection apply for estate tax planning purposes. The transfer during lifetime removes the asset from the current owner’s taxable state, avoiding estate taxes that might otherwise be due.
Income Tax Planning: Stepped-Up Tax Basis
Another reason why someone might use a contract to enter into a will is to obtain a stepped-up tax basis for their assets upon their death.
When a person dies, their assets are typically revalued to their fair market value at the time of death, which becomes the new tax basis for the person who inherits the assets. By entering into a contract to transfer ownership of the assets to another person, such as a trust or family member, before their death, the assets may be eligible for a stepped-up tax basis when the new owner inherits them.
For example, let’s say a person owns a piece of property that they bought for $50,000 but it is now worth $500,000. If the person were to sell the property during their lifetime, they would owe capital gains tax on the difference between the sale price and the original purchase price of $50,000. However, if the person were to enter into a contract to enter into a will and transfer ownership of the property to another party, the property would be eligible for a stepped-up tax basis of $500,000 upon the other person’s death. If the other person’s will transfers the property back to them, this means that if the original owner (now the owner again) were to sell the property for $500,000, there would be no capital gains tax owed, as there would be no gain from the original purchase price.
This case stands as a warning to those who have or are considering contracting with another person for a will. The contract must be in writing to be enforceable in Texas. In the right circumstances, this tool can help the parties achieve their goals. Wether it is estate planning or tax savings or asset protection.
Do you need help with a probate matter in Houston or the surrounding area? We are Houston probate attorneys. We help clients navigate the probate process. Call today for a free confidential consultation, 281-219-9090.
If you need help with your Texas probate matter, call us today for a FREE attorney consultation at (281) 219-9090.
Our Houston Probate Attorneys provide a full range of probate services to our clients, including helping with contract for wills. Affordable rates, fixed fees, and payment plans are available. We provide step-by-step instructions, guidance, checklists, and more for completing the probate process. We have years of combined experience we can use to support and guide you with probate and estate matters. Call us today for a FREE attorney consultation.
The content of this website is for informational purposes only and should not be construed as legal advice. The information presented may not apply to your situation and should not be acted upon without consulting a qualified probate attorney. We encourage you to seek the advice of a competent attorney with any legal questions you may have.